Shopify Inc (TSX:SHOP)(NYSE:SHOP) has not missed a beat this year, soaring past the $400 mark and looking unstoppable as of late. While its market cap approaches a monumental $50 billion valuation, it’s still nowhere near the size of Facebook Inc (NASDAQ:FB), which is more than 10 times that number.
However, that might also give Shopify more room to rise even more, especially now that it’s going to be getting into the fulfillment business as well, potentially unlocking even more growth for the company.
In contrast, Facebook might actually look like the safer, more stable stock of the two. Those aren’t kind words when it comes to growth stocks, and it raises a legitimate question as to whether it’s a better buy than Shopify, which has been growing at a rapid pace.
In its most recent quarterly earnings report, Shopify’s sales were up 50%. For most companies, that would be great, but for Shopify, that’s actually down from the growth it has achieved in previous years.
In 2018, its top line rose by 59%, which was down from the prior year’s growth rate of 73% and the 90% improvement the company saw in 2016. Growing at those levels was clearly unsustainable, and it’s likely that Shopify will continue rising at declining rates unless its new business ventures start to take off.
By comparison, Facebook’s growth rate was just 26% in its most recent quarter. It too is down from the 37% increase in sales that it posted in 2018. However, a key difference between itself and Shopify is that Facebook has consistently turned a profit over the past five years. Shopify hasn’t, and with all of its other projects planned I wouldn’t expect that to change anytime soon.
Differences go beyond just the financials
The numbers are just one side of the argument, the other being the overall businesses and their long-term prospects for success. In Facebook’s case, there’s really no substitute for its platform. Google tried and failed with its Google+ platform that just never came close to the same level of popularity of either Facebook or even Twitter for that matter.
People might get frustrated with Facebook amid its privacy issues and threaten to leave, but the reality is that most will likely end up complaining on the very same social media site.
Facebook has no real competition — and it won’t for the foreseeable future. Shopify, however, is facing competition from Facebook-owned Instagram and Adobe-owned Magento. Backed by big companies, these two tech stocks could put a serious dent in Shopify’s long-term growth.
The service it provides for merchants does not have the moat necessary for Shopify to be able to protect its position in the industry. There are also no significant barriers to entry and there’s a real possibility someone could eventually overtake Shopify.
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Shopify may be smaller and its sales are growing at a much higher rate, but the company’s lack of profitability and defensibility in the industry make it a hard investment to justify given the mammoth valuation it’s at today. It’s certainly not a better buy than Facebook.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Facebook. Tom Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Facebook, Shopify, and Twitter. The Motley Fool owns shares of Alphabet (A shares), Alphabet (C shares), Facebook, Shopify, Shopify, and Twitter. Shopify and Facebook are recommendations of Stock Advisor Canada.